Millennials Are on Track to Surpass Boomers in Retirement Savings
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Here's your money briefing for Thursday, October 26th. I'm J.R. Whelan for The Wall Street Journal. Millennials have lagged behind older generations when it comes to earnings and home ownership. But new data suggests they are moving ahead and saving for retirement.
When new hires join a company, rather than waiting for them to get around to signing up for the 401k plan, the employer just automatically puts them in the plan. And they're basically saving as a default rather than they have to proactively elect to save.
We'll talk to Wall Street Journal personal finance reporter Ann Tergesen after the break.
and how they may affect your finances and portfolio. Listen at schwab.com slash Washington Wise.
Millennials are on a better track for retirement savings than baby boomers and Gen X, according to new data from Vanguard. Wall Street Journal personal finance reporter Ann Turgerson joins me. So, Ann, millennials, or those born in the 1980s and 90s, have lagged behind prior generations in key areas of personal finance. Why is that?
It's well documented that they've lagged on key measures like home ownership and earnings. And there are a couple reasons for that. One is that many millennials came into the job market during turbulent times, during the great financial crisis in the aftermath of that. So they got off to a more difficult start in the job market. Millennials also have a lot of student debt compared to prior generations. So that has really cobbled their ability to accumulate wealth at the same pace as prior generations.
What's allowed them to move ahead in terms of retirement savings?
Why did millennials historically lag in earnings and homeownership?
What's allowed them to move ahead is actually something called automatic enrollment in 401k plans. 401k plans have over the past, say, 10 to 15 years, a large number of them have adopted what's called automatic enrollment, especially like the larger plans from large companies. The way that works is it's just what it sounds like that when new hires join a company, rather than waiting for them to get around to signing up for the 401k plan, The employer just automatically puts them in the plan and they can feel free to opt out if they want. They're basically saving as a default rather than they have to proactively elect to save.
How does that compare to older generations?
So the baby boomers came of age when the 401k was very new. And at that point, there was no such thing as automatic enrollment. It was entirely left up to them to decide whether to save and when to save. And a lot of them got off to late starts when it came to enrolling in 401ks. And Gen X is in between, but basically a lot of them were left on their own to make these decisions as well. And so that's really reflected in the retirement savings that each generation has been able to amass.
So what does this mean for the average millennial in terms of how prepared they'll be when it comes to retire?
So the Vanguard data shows that for a millennial earning the average or like the median salary in the middle of the income spectrum, that they are on track to replace about 60% of their pre-retirement income average. with both Social Security and savings from 401ks and IRAs. And in contrast with the baby boomers, they're only on track to replace 50% of their pre-retirement income. So you can see that millennials are doing considerably better in that area.
So does that mean that millennials who have automatically been enrolled are on track to have a retirement cushion?
If you've been automatically enrolled, you have some savings. It doesn't mean that the savings that you have are adequate. And that's been one criticism of automatic enrollment is that often companies automatically enroll people at 3% of pay, which is not enough. A lot of financial advisors recommend saving 12 to 15% of pay.
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